I just did it. Our family room was dark paneling. I've hated it for years and finally decided to paint it. I wanted to make this as simple as possible. Did not fill in the grooves. I painted it and sponged over it, to make it look like wall paper. It looks very, very nice. Here is what I did:
1. Wash paneling with TSP and rinse. Let dry.
2. Need to seal the paneling. I used Bulls Eye 1-2-3 Primer/Sealer (water based). (Have it tinted to the color you want the base coat of the wall).
3. Paint on the base coat. Let dry.
4. Sponge (or whatever method you choose) on the accent color/colors.
5. You are done and it looks great!
I chose a blue/gray base coat. Highlighted it with a light blue and put a few ivory accents through out the wall, to pick up the color of the carpet. I am very pleased with the results.